NiSource Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 27, 2020. The filing also reports fourth-quarter results. NiSource is a regulated natural gas and electric utility holding company serving approximately 4.0 million customers across seven states.
Financial performance and position
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Operating revenue | $5,208.9 million | $5,114.5 million |
| Operating income | $890.7 million | $124.7 million |
| Net income (loss) | $383.1 million | $(50.6) million |
| Net income (loss) available to common shareholders | $328.0 million | $(65.6) million |
| Basic EPS | $0.88 | $(0.18) |
| Net cash from operating activities | $1,583.3 million | $540.1 million |
| Cash capital expenditures | $1,802.4 million | $1,818.2 million |
| Total assets | $22,659.8 million | $21,804.0 million |
| Total consolidated indebtedness | $9,642.8 million | Not stated here on a comparable basis |
| Net available liquidity | $1,409.1 million | $974.6 million |
Reported operating margin was approximately 17.1% in 2019 versus 2.4% in 2018; net margin was approximately 7.4% versus a loss margin of approximately 1.0%. These ratios are heavily affected by incident-related insurance recoveries and expenses, and 2019 impairments. Operating cash flow less cash capital expenditures was approximately negative $219 million in 2019. The company paid $298.5 million in common dividends and $56.1 million in preferred dividends.
- Gas Distribution Operations reported revenue of $3,522.8 million and operating income of $675.4 million, versus an operating loss of $254.1 million in 2018. Revenue benefited from rate increases and infrastructure trackers; 2019 volume was lower, primarily due to warmer weather.
- Electric Operations reported revenue of $1,699.2 million and operating income of $406.8 million, up $20.7 million. Electric sales declined 4.4%, reflecting cooler weather and increased self-generation by large industrial customers.
- Debt included $7,869.6 million of long-term debt, including current maturities, and $1,773.2 million of short-term borrowings. The debt-to-capitalization ratio was 61.7%, below applicable covenant limits of 70% and 75%. A 100-basis-point change in short-term rates would affect annual interest expense by an estimated $19.0 million, based on 2019 average borrowings.
Material changes versus 2018
- Common-shareholder income improved by $393.6 million, principally because incident-related expenses net of recoveries were lower and the company recorded additional insurance recoveries and new rates. The comparison is unusually affected by the Greater Lawrence Incident: 2018 recorded an $888 million pretax loss, while 2019 recorded a $227 million pretax benefit from incident costs and recoveries.
- In fourth-quarter 2019, NiSource recorded $204.8 million of goodwill impairment and $209.7 million of franchise-rights impairment relating to Columbia of Massachusetts. The franchise rights were written down to zero, as was that reporting unit’s goodwill.
- Operating cash flow rose by $1,043.2 million, mainly due to $795 million of incident-related insurance cash receipts and approximately $220 million less incident-related cash spending. Capital expenditure remained substantial at $1,867.8 million on the company’s reported capital-program basis.
- Long-term debt increased, including issuance of $750 million of 2.95% senior notes due 2029. Short-term borrowings declined from $1,977.2 million to $1,773.2 million.
- Quarterly results were uneven: fourth-quarter 2019 net loss was $139.3 million, or $0.41 per basic share, including the two impairment charges.
Outlook, significant events and risks
- Massachusetts sale: On February 26, 2020, NiSource agreed to sell substantially all of Columbia of Massachusetts’ business to Eversource for $1.1 billion cash, subject to adjustments and regulatory and other conditions. The transaction was expected to close by September 30, 2020. The filing estimated a pretax loss of approximately $360 million if the business qualified as held for sale at March 31, 2020; the final amount depends on transaction costs, working capital and closing-date balances. The buyer does not assume specified Greater Lawrence Incident liabilities, including certain pre-closing injury and property-damage claims.
- Greater Lawrence Incident: The 2018 gas distribution fires and explosions caused one fatality, injuries and extensive property damage. NiSource had recorded $1,041 million of third-party claims and government fines, penalties and settlements, estimating a total of $1,041 million to $1,065 million, excluding certain unestimable matters. It had also recorded $420 million of other incident-related costs and estimated a total of $450 million to $460 million. The full $800 million of available third-party liability insurance had been collected; incident costs exceeded that coverage.
- Columbia of Massachusetts completed replacement of the affected 45-mile pipeline system at a capital cost of approximately $258 million. NiSource filed a property-insurance claim and sued its insurer in January 2020; recovery timing and amount were unclear. Any unreimbursed investment depends on future regulatory treatment, which the filing describes as uncertain.
- Under February 2020 agreements with the U.S. Attorney’s Office, Columbia of Massachusetts agreed to plead guilty to violating the Natural Gas Pipeline Safety Act and pay a $53.0 million fine, subject to court approval. NiSource entered a three-year deferred prosecution agreement, including a requirement to use reasonable best efforts to sell the Massachusetts business and to forfeit any profit or gain from a sale under the agreement’s terms. Compliance failures could trigger further action.
- Management planned approximately $1.8 billion to $1.9 billion of 2020 capital spending and described approximately $30 billion of projected long-term regulated infrastructure investment. NIPSCO’s resource plan calls for retiring 2,080 MW of coal capacity by 2023 and 2028, with renewable generation and storage among the planned replacements. Execution, approvals, project costs and recovery through rates remain risks.
- Other material risks include high leverage and access to capital, regulatory rate outcomes and cost recovery, weather and energy demand, environmental compliance, aging infrastructure, operational safety, insurance availability, litigation and investigations, pension funding, commodity and interest-rate exposure, and cyber incidents. S&P rated NiSource BBB+ with a negative outlook at year-end; Moody’s rated it Baa2 stable and Fitch BBB stable.
Most important facts for investors to verify
- Whether the Eversource sale received all required approvals and closed, and the final proceeds, adjustments, transaction loss and any continuing liabilities.
- The court’s treatment of the Columbia of Massachusetts plea and compliance with the plea agreement and NiSource deferred prosecution agreement, including the fine, monitor, sale obligations and any profit forfeiture.
- Final costs and claims from the Greater Lawrence Incident, including matters excluded from recorded estimates and the class settlement’s final approval and implementation.
- Whether the pipeline property-insurance claim is recovered and whether regulators permit recovery of unreimbursed replacement costs and an adequate return.
- Whether planned capital investment and coal retirements proceed on schedule and are recovered in rates, including the economics and regulatory status of renewable projects.
- Liquidity, refinancing needs, credit ratings, covenant headroom and dividend capacity given debt, capital spending and incident-related cash requirements.